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Aviation History
1959
1959 - 1070.PDF
17 April 1959 523 1950-57 to an average level of 36 cents per c.t.m. Provisionalfigures for 1958 suggest that this reduction was temporarily halted last year. With non-American carriers this levelling-off processappears to have taken place rather earlier: over the past two or three years average unit costs for this group have stood at about40 pence (47 cents) per c.t.m. Not only has the traffic-growth rate been falling as cost levelshave been rising, but average revenue yields have been dropping. This decline has extended over the past decade. The average farereceived by U.S. domestic trunk carriers, for instance, has fallen from an average of 5.75 cents per passenger-mile in 1948 to 5.25cents in 1957. A general fare increase was instrumental in pre- venting serious decline last year. During this same period theU.S. overseas carriers experienced a fall in average revenue-rates from 8.0 cents per passenger-mile to 6.6 cents. The decline hasalso occurred in the old world, chiefly as a result of the introduction and extension of tourist- and coach-class fare levels. Althoughseveral recent fare-increases have to some extent checked the reduction, yields are likely to continue to fall for some time aseconomy-class travel, inclusive-tour concessions and other cheap rates are extended throughout Europe, Africa and Asia. In a report published last June, Dr. Paul Cherington suggestedto the American Government that the outcome of all these factors was that U.S. domestic trunk carriers were in danger of beingunable to complete their financing arrangements under the credit conditions ruling at that time. Within a few months of thiswarning National Airlines cancelled three of their six DC-8s originally ordered in September 1955 and Delta reduced theirorder for DC-8s from eight to six by placing two aircraft on an option basis. Of no less than £273 million additional financingrequired by the main U.S. airlines at the time of the Cherington Report (all of which would have to be found by 1962), almost onehalf (£112m) related to T.W.A. while £42 million represented Pan American's unarranged finance. With the exception of T.W.A.(which could presumably raise the required funds if Howard Hughes gave the go-ahead to the Hughes Tool Co.) nearly allthe shortfall evident in June 1958 has now been eliminated. This, as will be examined, has been possible only by reliance on loansfrom financial institutions. The financing problems of airlines outside the U.S. have beeninfluenced to a large extent by the fact that a majority of the major carriers are either state-owned or controlled financially bythe state. In many cases, such as Air France and B.O.A.C., there is little real economic difference between government funds sub-scribed in return for stock and funds subscribed by the same governments in the form of long term loans. In each case theinvestor is the same. This is in sharp contrast to the joint-stock U.S. carriers, which have to compete for their funds in openmarkets and thus have to comply with stringent conditions. Nonetheless, the problems facing non-American carriers areserious. This has been shown by the experience of operators in France, Australia, Brazil and Mexico. Both French independentcarriers, TAI and UAT, found that the government insisted on a reduction in their anticipated order from four DC-8s each to atotal of four between them. The same principle—conservation of capital—was adopted in Australia, where the government ruled outT.A.A.'s preference for the Caravelle and placed an upper limit to the number of Electras that Australian carriers would be per-mitted to order. The Brazilian Government also has considered placing restrictions on investment requirements. The device usedhere is likely to be a withholding of loan capital or subsidy unless orders and operations are rationalized. The Mexican carriers haveresorted to another techniques—voluntary pooling of equipment. (CMA and Aeronaves now jointly operate the last-named com-pany's Britannias.) The degree of official pressure behind this is not known. This trend towards conservation of capital—and consequentreduction of capital requirements—is becoming increasingly apparent and is evident in various other directions. The Swissair-SAS agreements concerning their Convair 880s, DC-8s and Caravelles form a case in point, as does the contract between PanAmerican and National whereby the latter has contracted to lease Boeing 707s from Pan American during the winter season, bothcarriers also agreeing to an exchange of stock. Further examples of capital rationalization are the agreements between East AfricanAirways, Central African Airways, Ghana Airways and Nigerian Airways on the one hand and B.O.A.C. on the other. By charter-ing modern aircraft from the British carrier these smaller companies are able to obtain a given capacity with a more reducedcapital commitment than would otherwise have been the case. A final technique used to reduce capital needs is the leasing ofequipment. Sabena used lease arrangements in respect of some of its DC-7C fleet while American Airlines will lease the enginesto be installed in the 25 Boeing 720s and 25 Convair 600s ordered during last August. In the past months airline management has been pre-occupiedwith the problem of obtaining the necessary funds to permit realization of re-equipment plans. But the implications of themanner in which this investment programme has been carried out suggest that those carriers that have managed to arrange this pro-gramme satisfactorily will soon be faced by an even more onerous problem: how to meet their debts. The U.S. industry is themost significant in this respect, because the financial health of a joint-stock enterprise is profoundly affected by the manner inwhich capital is raised. The credit status of a State-owned airline and its ability to raise capital is frequently as dependenton the state of the national economy or on changes in the political climate as on its own financial ability. A joint-stock enterprise, onthe oiher hand, despite the availability of subsidy in the last resort, is answerable to private or institutional investors. Although these financial problems are difficult, they are notinsurmountable. As has been emphasized, many of the diffi- culties reflect the deterioration in the industry's earnings duringthe past two years. In the light of this deterioration it is obvious that many airlines have over-extended themselves. The jet com-mitments represent a considerable increase in investment which, under today's adverse conditions, is not being accompanied by aproportionate increase in revenues. This means that the ratio of revenue to investment in equipment has been declining, and as aconsquence of this every unit of revenue is costing more to earn. But trading conditions are already changing: by the time all thenew equipment is in operation it is possible that traffic will be expanding again at a buoyant 15 per cent per annum. (to be concluded) Left, Douglas DC-8: 139 on order, at a cost of about £31 Om with spares, by 18 airlines. Right, Boeing 707: 187 on order, at a cost of about £380m with spares, by 16 airlines
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